CENTRAL NATIONAL FIRE INSURANCE COMPANY v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 03 April 1931 |
| Docket Number | Docket No. 22614. |
| Citation | 22 BTA 1054 |
| Court | U.S. Board of Tax Appeals |
| Parties | CENTRAL NATIONAL FIRE INSURANCE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
Walter E. Barton, Esq., and Raymond C. Cushwa, Esq., for the petitioner.
H. B. Hunt, Esq., for the respondent.
The petitioner seeks the redetermination of a deficiency in income taxes for the year 1922 in the sum of $17,301.48. In its petition and an amendment thereof the petitioner made five assignments of error, three of which have been abandoned. The errors now urged are:
(a) The respondent erred in including in unearned premiums as of December 31, 1921, the amount of $101,393.22, representing the portion of said unearned premiums as of December 31, 1921, transferred to reserve account from paid-in surplus account. (In its brief petitioner reduces the amount in question to $91,670.88.)
(b) The respondent erred in failing to deduct in 1922 a net loss sustained by the petitioner in 1921 in the amount of $60,126.69. (In its brief petitioner reduces the amount of the net loss claimed to $22,511.93.)
FINDINGS OF FACT.
The petitioner is a corporation incorporated in 1916 under the laws of the State of Iowa for the purpose of writing fire, windstorm, tornado and life insurance. Its principal place of business was at Des Moines, Iowa. It commenced business in May, 1917, and the principal business done by it was the writing of fire insurance.
The paid-in capital of the petitioner was $1,000,000, of which $500,000 was credited to capital stock and $500,000 to paid-in surplus. Of the amount credited to paid-in surplus $150,000 was expended in connection with the sale of the petitioner's stock, with the result that the paid-in surplus as of December 31, 1917, amounted to $350,000.
On June 1, 1922, the petitioner entered into a contract with the Connecticut Fire Insurance Company, reinsuring its outstanding risks in the latter company, effective at 12 o'clock noon on June 1, 1922. The petitioner thereupon proceeded to liquidate its affairs. In accordance with the contract entered into by the petitioner with the Connecticut Fire Insurance Company, the latter corporation assumed the following liabilities:
All the liability of the said Central National for loss or damage under its policies, reinsurance treaties or entries or under "binder" contracts of insurance awaiting the issuance of policies, in actual force and effect on the first day of June, Nineteen hundred and twenty-two at twelve o'clock noon of that day (standard time wherever any loss may occur).
All liability of said Central National under its policies of insurance or reinsurance which shall be written or renewed by the said Central National or its agents between the first day of June, Nineteen hundred and twenty-two at twelve o'clock noon of that day and the first day of September, Nineteen hundred and twenty-two, at twelve o'clock noon of that day (standard time wherever any loss may occur).
All liability of said Central National under its policies of insurance or reinsurance written or renewed on or before the first day of June, Nineteen hundred and twenty-two, at twelve o'clock noon (standard time wherever any loss may occur), but which policies were written to take effect at a date subsequent to the first day of June, Nineteen hundred and twenty-two.
It being understood, however, that there shall be excluded from this contract any adjusted or unadjusted losses that may have occurred prior to the first day of June, Nineteen hundred and twenty-two (twelve o'clock noon standard time).
This treaty shall not cover any risks or policies that may, prior to noon of the first day of June, Nineteen hundred and twenty-two, have been entirely reinsured by said Central National in any other company.
The contract of reinsurance also provided as follows:
It is understood that should the Central National hold policies or treaties of reinsurance in other companies covering on any of its own policies or entries embraced under this treaty, it shall be permitted to deduct from the gross unearned premium on its own policies the pro rata unearned premium on such reinsurance policies or entries upon condition, however, that the said Central National shall secure an assignment of such reinsurance in favor and for the benefit of the said Connecticut, the Connecticut reserving to itself the right to reject in whole or any part all such insurance.
The reinsurance commissions hereinafter provided for shall be computed on the net pro rata premiums after deducting said pro rata reinsurance premiums and return premiums up to the first day of September, 1922, the final date for the delivery of the schedule above provided for. The Connecticut receiving premium and assuming liability only upon the net amount retained by the Central National but representing the said Central National as its substitute in its relations with its reinsurers.
* * * * * * *
The Central National hereby covenants and agrees that it will pay the Connecticut the gross pro rata unearned premium for the unexpired terms, respectively, of the policies or contracts reinsured hereby, calculated prior to any deductions of any discount, brokerage or rebate of any kind, after deducting pro rata reinsurances and cancellations, as hereinabove provided for, and a reinsurance commission of sixty per cent.
The unearned premium reserve referred to in the reinsurance contract was the reserve which the petitioner was required to set aside and deposit with the State of Iowa pursuant to the laws of said State in order to protect its policyholders from loss.
In each of the years 1918, 1919, 1920, 1921, 1922, and 1923 the petitioner filed with the Commissioner of Insurance of the State of Iowa, pursuant to the law of said State, its annual statement showing its condition and affairs for the preceding calendar year. The form on which this statement was made was the "Convention Edition" for stock fire and marine companies. This annual statement set forth the assets and liabilities of the petitioner as of the last day of the year preceding the date of the statement. Among other things it contained a statement of the earned and unearned premiums as of the last day of the year covered by the annual statement. It also set forth the amount of the petitioner's surplus at the end of the year to which the annual statement related, together with a statement of the amount of the increase or decrease of such surplus during the year.
The unearned premiums at the end of each year from 1917 to 1922, inclusive, were as follows:
1917 ________________________ $28,722.67
1918 ________________________ 140,592.50
1919...To continue reading
Request your trial